CBEC: No service tax on booking, construction and sale of residential flats

Construction of residential complex was brought under service tax w.e.f. 01.06.2005. Doubts have arisen regarding the applicability of service tax in cases where developers / builders / promoters enters into an agreement, with the ultimate owner for selling a dwelling’ unit in a residential complex at any stage of construction (or even prior to that) and who makes construction linked payment. The ‘Construction of Complex’ service has been defined under Section 65 (105)(zzzh) of the Finance Act as “any service provided or to be provided to any person, by any other person, in relation to construction of a complex”. The ‘Construction of Complex’ includes construction of a ‘new residential complex’. For this purpose ‘residential complex’ means any complex of a building or buildings, having more than twelve residential units. A complex constructed by a person directly engaging any other person for designing or planning of the layout, and the construction of such complex intended for personal use as residence by such person has been excluded from the ambit of service tax.

2. A view has been expressed that once an agreement of sale is entered into with the buyer for a unit in a residential complex, he becomes the owner of the residential unit and subsequent activity of a builder for construction of residential unit is a service of ‘construction of residential complex’ to the customer and hence service tax would be applicable to it. A contrary view has been expressed arguing that where a buyer makes construction linked payment after entering into agreement to sell, the nature of transaction is not a service but that of a sale. Where a buyer enters into an agreement to get a fully constructed residential unit, the transaction of sale is completed only after complete construction of the residential unit. Till, the completion of the construction activity the property belongs to the builder or promoter and any service provided by him towards construction is in the nature of self service. It has also been argued that even if it is taken that service is provided to the customer, a single residential unit bought by the individual customer would not fall in the definition of ‘residential complex’ as defined for the purposes of levy of service tax and hence construction of it would not attract service tax.

3. The matter has been examined by the Board. Generally, the initial agreement between the promoters / builders / developers and the ultimate owner is in the nature of ‘agreement to sell’. Such a case, as per the provisions of the Transfer of Property Act, does not by itself create any interest in or charge on such property. The property remains under the ownership of the seller (in the instant case, the promoters / builders / developers). It is only after the completion of the construction and full payment of the agreed sum that a sale deed is executed and only then the ownership of the property gets transferred to the ultimate owner. Therefore, any service provided by such seller in connection with the construction of residential complex till the execution of such sale deed would be in the nature of ‘self-service’ and consequently would not attract service tax. Further, if the ultimate owner enters into a contract for construction of a. residential complex with a. promoter / builder / developer, who himself provides service of design, planning and construction; and after such constitution the ultimate owner receives such property for his personal use, then such activity would not be subjected to service tax, because this case would fall under the exclusion provided in the definition of ‘residential complex’. However, in both these situations, if services of any person like contractor, designer or a similar service provider are received, then such a person would be liable to pay service tax.

4. All pending cases may be disposed of accordingly. Any decision by the Advance Ruling Authority in a specific case, which is contrary to the foregoing views, would have limited application to that case only. In case any difficulty is faced in implementing these instructions, the same may be brought to the notice of the undersigned.

(Gautam Bhattacharya)Commissioner (Service Tax)CBEC, New Delhi

Service Tax Circular No.108/02/2009 Dt. 29th January 2009

F. No. 137/12/2006-CX.4Government of IndiaMinistry of FinanceDepartment of RevenueCentral Board of Excise and Customs

Like this:

I BOOKED A RESDENTIAL FLAT FROM A BUILDER AT JHARKHAND JAMSHEDPUR IN 2005 WITH CONSTRUCTION LINKED PAYMENT.I COMPLTED MY PAYMENT WIHIN 2 YEAR BUT CONSTRUCTION BY BUILDER DLAYED. NOW HE HAS COMLETED THE CONSTUCTION TWO YEAR LATE. NOW BUILER IS DEMANDING SERVICE TAX ON TOTAL BEFORE HANDING OVER/NOT MAKING REGISTRY,.IN THIS CASE SERVICE TAX IS APPLICALE OR NOT .

Hello, Thanks for writing. First of all you must have read the Circular about the Service tax on residential flats. Your case does not seem to be covered under service tax provisions.

What is the amount of service tax he is demanding? Probably, like other unscrupulous builders, he may be charging and pocketing the same without actually remitting it to the Central Government. You must take a firm view for the delay in construction and if he does not budge, you may write a letter to the Consumer Redressal Forum asking them to intervene and investigate about the service tax collected from all others and not remitted to the exchequer. He cant take the benefit of Unjust enrichment.

Dear Mr. Gulab
thanks for your earlier comments. i was happy to see it. but recently i received another view which falls otherwise.. since it is a pdf, i can not put it here.. but if you share your email id i can send it to you..

Thanks Mr. Gulab. i have sent an email to you with pdf attached. just to brief you theed my case.. we (I and builder) has signed “agreement to sell” and “Construction agreement”. whole complex is under construction but few block is read where builder is giving possession and asking for Service tax, referring attached article (i sent in separate email to you..).
for your information, builder has many sub-contractors which working for him on this project..

i have booked a flat in a resintial construction company,Noida two month before which is construction linked payment.I have paid 10% of the total basic price of the flat including service tax.Now again they are demanding service tax ob 2nd instalment.Accoring to u r above said circular , am i liable to pay service tax on my flat.an early reply in this regard will be appreciated.regards,Mohan kumar Menon

Please read the agreement especially the clause pertaining to Service Tax that has been entered between you and the Builder. Also ensure that there are over 12 dwelling units for the Builder to charge you service tax.
Please also read Clause 3 of the said post. That would give you enough understanding.